Marine Hull Insurance. Valuation. Average Clauses Relating to Hull Insurance.

    Valuation of a vessel for insurance purposes presents a number of important problems. Manifestly the insured should be fully protected, and yet the valuation should not be such as will cause an inducement to bring about the destruction of the vessel. Value, it is apparent, is also changeable since it is based on such factors as the prevailing level of freight rates and the cost of reproduction at the time the insurance is negotiated. Even during the lifetime of the policy these factors may change so greatly as to alter the value sufficiently to create a moral hazard.

    As compared with merchandise, the value of vessels is much more difficult to prove, and chiefly for this reason hull insurance is nearly always written on the valued principle. Valued policies, as previously explained, specify an agreed value of the subject matter insured, and, in the absence of misrepresentation or other fraud, this valuation is final and binding. Both insured and underwriter are thus secured against any dispute arising with respect to the vessel's value in case of loss. But it is highly important to the underwriter, who grants full insurance, covering general average and particular average losses, as well as total loss, that the valuation expressed in the policy should be reasonably high. Such losses are determined on a percentage basis in relation to the total value insured. It is for this reason that the insured is usually required to agree that only a designated percentage of the vessel's full value shall be covered by policies limited in their coverage.

Average Clauses Relating to Hull Insurance.

     As was the case in cargo insurance, hull policies contain a variety of clauses which limit the underwriter's liability with respect to partial losses. Most frequently a minimum franchise of three or five per cent, or a definitely stipulated sum, is used and this minimum is applied " on each valuation separately or on the whole." The wording customarily used is as follows:
This policy is warranted free from particular average under 3 per cent, or unless amounting to (here follows some figure like $2,000 or $5,000), but nevertheless when the vessel shall have been stranded, sunk, on fire or in collision with any other vessel, underwriter shall pay the damage occasioned thereby, and the expense of sighting the bar after stranding shall be paid, if reasonably incurred even if no damage be found. Average payable on each valuation separately or on the whole, without deduction of thirds, new for old, whether the average be particular or general.

     Separate valuations, such as on the hull, fittings, and machin- ery, or the stipulation of a definite sum instead of a percentage, are resorted to because valuations often reach such large proportions that the application of a definite percentage to the total value would involve an unreasonably heavy burden on vessel owners before the underwriter's liability would attach. Applied to an illustration the aforementioned clause, calling for average " on each valuation separately or on the whole " would operate as follows if the franchise was fixed at " three per cent, or unless amounting to $5,000." Suppose that the hull and machinery of a steamer are valued separately for insurance purposes at $400,000 and $200,000 respectively, and that a casualty, other than one of the four enumerated in the clause, causes a loss to the hull of $2,000 and to the machinery of $7,000. In the absence of separate valuations and a minimum franchise of $5,000, there would be no liability on the underwriter, since three per cent on the total value of $600,000 would be $18,000, or much in excess of the loss of $9,000. But with separate valuations, the underwriter would be responsible for the $7,000 loss on machinery, since this amount exceeds the three per cent on the valuation of $200,000, or $6,000. On the hull, if there were only a three per cent franchise, there would be no liability, since three per cent of $400,000 is $12,000, as compared with a loss of only $2,000. Here, however, the underwriter is made liable by the minimum franchise of only $5,000, since the adjustment is based " on the whole " value, and the loss on this value is $9,000. It should be added that the underwriter is responsible for the entire loss if the same reaches the minimum franchise provided for, but no general average loss and no expenses incidental to ascertaining and proving the loss may be added to the particular average losses in order to make up the specified franchise. Successive losses occurring at different times on the same voyage, however, can be combined to make the three per cent or other figure stipulated in the policy.